Property Investor or Property Developer

Simon Misiewicz

Expat & Property Tax Specialist

9th June 2022

Property Investor or Property Developer

When it comes to getting into property development, many landlords look at if they should be a property investors or developers.

The main motivation to choose property investment or development often hinges upon the tax on UK property.

There are tax benefits to being a property investor or a property developer, and it is down to each individual’s tax position to decide which is best for them.

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What are the basics of being a property investor or property developer?

As property accountants serving thousands of UK landlords that purchase buy-to-let properties, we know that many of our property investor clients are also interested in becoming property developers.

Property investment and property development are two quite different areas of the same sector.

Property investment is consistently the most popular investment option in the UK.

UK property prices are proven to rise over the long term.

People also understand property, and it is one of the most straightforward ways to set up a stable business in the UK.

A property investor or developer doesn’t have to invent anything, have special qualifications, or be a member of a professional body or governing organisation.

There are many examples of UK property investors and highly successful property developers.

Whether you decide to be a property investor, a property developer, or both, the most critical factor is to understand the tax on UK property.

What is a property investor?

A property investor usually focuses on providing the funds required to purchase and rent a property.

Property investment in the UK includes purchasing a property to rent out over a long-term basis for profit.

It can include a mixed property portfolio comprising buy-to-let properties, second homes, business premises or land.

If you decide to become a property investor, you will usually be liable for Capital Gains Tax (CGT) if the property is sold.

CGT is payable on the difference between the cost of a property and any proceeds you make from it.

CGT applies to any property investor and not to anyone who lives in a property as their main residence and wishes to claim Private Residence Relief.

A property investor will not pay CGT if they transfer the property to a partner if you have lived together for at least a part of the tax year in which the disposal is made.

If the property is later sold, a property investor must work out any due tax.

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What is a property developer?

A property developer builds a property from the ground up or makes significant improvements to a property to sell it as part of a trade.

Anyone buying and selling property as their main business will usually be classified by HMRC as a property developer for tax purposes.

A property developer is seen as having a trade and must pay Income Tax and National Insurance on their profits.

Certain expenses occurring in the development process, such as mortgage or loan interest, can be deducted from the profit.

A property developer will understand that projects are not usually quick and can continue across multiple tax years.

A self-employed property developer will be liable to pay Class 2 National Insurance at a weekly rate and Class 4 National Insurance at a rate of 2% or 9% depending on their income.

A property developer needs to distinguish between property investment and development to ensure they pay the correct taxes.

Building a house in the UK can range from £300 to £3,000 a square metre, with the average UK house now occupying around 70 square metres.

Therefore, a UK property developer spends between £21,000 and £210,000 to develop each property.

This wide range is reflected in the vastly differing prices for land acquisition across the UK. Land will cost significantly more in central London than in Loughborough.

Any housing development will require a property developer to invest a lot of capital.

A property developer needs to be able to secure money and tie it up in properties being developed rather than being rented and earning a consistent income.

A property developer needs to have a solid understanding of the market, where there is demand for houses, what type of houses, and whether the land is available for a reasonable purchase price.

A property developer will also need to be able to navigate around various UK planning regulations.

A good property developer must project manage the construction of the houses and need skills including sales, marketing, finance, HR and property law.

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Are there UK property investor tax implications?

A property investor needs to understand the tax on UK property.

Getting into property investment will mean a property investor is liable for CGT, but the legal and other acquisition and sale costs can be deducted from the gain.

Loan costs, mortgage interest, maintenance and other running costs cannot be deducted from the gain, but a property investor can claim these against any rent received from their property for income tax purposes.

Capital losses can only be relieved against other capital gains in the same tax year or future tax years.

What UK taxes must a property developer pay?

A property developer is classed as carrying on a trade and is liable for both Income tax and National Insurance on their trading profit.

The trading profit includes a deduction for all expenses incurred exclusively in the course of carrying out trade.

For a property developer, loan or mortgage interest is an allowable expense in calculating profit.

Any losses can be relieved against other income if the property developer can prove the intention of making a profit.

If a property developer is not operating through a limited company structure, the rate of Income Tax after their personal allowance is either 20%, 40% or 45%, depending on the total income.

It is important for property developers to understand the workings of Residential Property Developer Tax (RPDT) in their daily operations if they are developing residential properties.

The HMRC manual on RPDT is essential reading.

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